How Much Does 'Home Equity' Really Matter?

When was the last time you sat down and calculated your home's equity? Has it been a day? A week? A month? Have you ever really thought about how much equity you have?

It's OK if you haven't. In fact, you're probably pretty normal, really. But there's a funny thing that happens to people when the real estate market ends up in the news a lot: They start to count their chickens before they hatch. By that, I mean, they start to look at their home equity like it's a real thing.

What is home equity?

Home equity, as properly defined, is the amount of value your home has after any debts against it are satisfied. If you have a mortgage, your home's equity is your home's value minus what you owe your mortgage lender. But looking at your home's equity is like looking at a single frame of a film -- it's only a peek at one moment in time. What your home equity is today isn't the same as tomorrow. And there's no guarantee that it'll grow.

Here are some other important things to know about home equity.

Equity goes up and down

It's vital to understand that equity isn't static, and it definitely doesn't always go up. Take, for example, the real estate market crash of 2007.

I had been a real estate agent for nine years at that point, and for the first time in my career, I was very painfully aware that home equity isn't static, nor is it guaranteed to be cumulative. This was when we all learned the terms "upside down" and "underwater mortgage," which was not a great time for us -- both of these terms refer to negative equity in a home, where the mortgage is more than the property it secures is worth.

CNBC reported in early 2008 that 10.3% of homes would be upside down by the end of March, and it just kept getting worse. On the flipside of that, in 2020 and 2021, we saw a huge jump in equity for anyone who bought a home before the COVID-19 pandemic, and many who bought at some early point during that equity arc.

They're still holding on to those massive equity gains, even if the years following only gained in the sub-3% range, but there's literally no promise that this will be the case tomorrow or that equity will not go backward if a widespread affordability crisis sets in.

Remember, equity is just a snapshot of a moment in your home's value versus how much you've borrowed against it.

Median Sales Price of Homes in U.S.

Other homes also gain equity at roughly the same pace

The funny thing with how the market has gained recently is that a lot of people are thinking about how much equity they can cash out if they sell. If you bought the median home in December 2018, for example, and sold it in December 2023, you'd be sitting on a 44.91% market gain, plus the amount of your mortgage that you paid down on your own.

That's a pretty good chunk of change on the surface.

But if you're looking to trade for a comparable home in a similar area, the only equity gain you've made is how much of your mortgage you've managed to pay down. The rest is a wash. You didn't get that equity in a vacuum, you got it because all the other houses also got an equity bump. The only way to cash out that newfound equity is to move to a less costly area or downsize, which plenty of people have chosen to do, but doesn't exactly move you up the ladder.

If you move up, you've still got the same amount of equity, but likely a higher-rate mortgage and possibly a higher payment. At its best, it's a lateral move. This is why despite a huge equity gain, a lot of people still aren't selling.

What is home equity good for?

While you're busy paying a mortgage and earning your equity bit by bit, home equity has just a few limited uses. It's great if you want to do some remodeling or upgrading that could potentially increase your home's value and create bonus equity along the way. A home equity loan or home equity line of credit (HELOC) can tap the equity you've already built or gained through market growth, making it easy to pay for those upgrades.

And once you pay the mortgage off, there's also the potential for generational wealth-building. When your kids get your house, that is a true gain for them for your hard work -- after all, they put in $0 and got all the equity you earned out. It can help them get on the property ladder with less money, or enable them to simply not have to pay a mortgage, which frees up money for them to invest in other things like a brokerage account or their 401(k).

Home equity is rarely what people think, but it's also not nothing. It's not wealth-building in a direct sense, but it makes building wealth possible over the long term. You will always need somewhere to live, so you might as well make it count for something.